Patrick Corporation acquired 100 percent of O’Brien Company’s outstanding common stock on
January 1 for $550,000 in cash. O’Brien reported net assets with a carrying amount of $350,000 at
that time. Some of O’Brien’s assets either were unrecorded (having been internally developed) or
had fair values that differed from book values as follows:
Book
Values
Fair
Values
Trademarks (indefinite life) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 60,000
$160,000
Customer relationships (5-year remaining life) . . . . . . . . . . . . .
–0–
75,000
Equipment (10-year remaining life) . . . . . . . . . . . . . . . . . . . . . . .
342,000
312,000
Any goodwill is considered to have an indefinite life with no impairment charges during the
year.
The following are financial statements at the end of the first year for these two companies prepared from their separately maintained accounting systems. O’Brien declared and paid dividends in
the same period. Credit balances are indicated by parentheses.
Patrick
O’Brien
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(1,125,000)
$(520,000)
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . .
300,000
228,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . .
75,000
70,000
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . .
25,000
–0–
Income from O’Brien . . . . . . . . . . . . . . . . . . . . . . . . . .
(210,000)
–0–
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (935,000)
$(222,000
)
Retained earnings 1/1 . . . . . . . . . . . . . . . . . . . . . . . . .
$ (700,000)
$(250,000)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(935,000)
(222,000)
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . .
142,000
80,000
Retained earnings 12/31 . . . . . . . . . . . . . . . . . . . .
$(1,493,000
)
$(392,000
)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 185,000
$ 105,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
225,000
56,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
175,000
135,000
Investment in O’Brien . . . . . . . . . . . . . . . . . . . . . . . . .
680,000
–0–
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
474,000
60,000
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . .
–0–
–0–
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
925,000
272,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
–0–
–0–
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,664,000
$ 628,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (771,000)
$(136,000)
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(400,000)
(100,000)
Retained earnings 12/31 . . . . . . . . . . . . . . . . . . . . . .
(1,493,000)
(392,000)
Total liabilities and equity . . . . . . . . . . . . . . . . . . . .
$(2,664,000)
$(628,000)
a.
Show how Patrick computed the $210,000 Income of O’Brien balance. Discuss how you determined which accounting method Patrick uses for its investment in O’Brien.
b.
Without preparing a worksheet or consolidation entries, determine and explain the totals to be
reported for this business combination for the year ending December 31.
c. Verify the totals determined in part (b) by producing a consolidation worksheet for Patrick and
O’Brien for the year ending December 31.